U.S. banks are enticing customers to lock in deposits with promotions, analysts say

It has been months since consumers have clamored for banks to increase the amount of money they pay out to their deposits in light of interest rate hikes by the Federal Reserve. Apparently, lenders are now making changes to their offers in a bid to keep customers' cash in their accounts for as long as possible after the banking crisis rocked markets last month.

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Several U.S. banks have been offering signing bonuses to lure depositors to open new accounts or maintain regular deposits with them in order to gain their business. A number of these promotions are running at a time when Silicon Valley Bank (SVB) and Signature Bank both failed last month, sending customers running for the hills, and prompting them to move $119 billion out of smaller institutions as a result.

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Capital One Financial Corp. (COF ) has advertised that if you open a new savings account with more than $10,000 in it for 90 days, you will receive a $100 bonus. Depending on the amount deposited, the bonus ramps up to $1,000 for deposits over $100,000. There are a number of companies, including Discover Financial Services ( DFS ) and LendingClub ( LC ), that offer similar perks that were already in effect before the bank runs started.

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A $25 bonus is being offered by Citizens Financial Group to customers who invest $100 a month for three months and maintain a minimum balance of $100, according to emails that were sent to customers after March 10. Citizens spokeswoman Eleni Garbis said in a statement that the offer is being made part of a campaign that is being pre-planned for the purpose of promoting healthy savings habits, rather than in response to any specific events.

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There was no immediate response to requests for comment from Capital One or Discover.

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Analysts are of the opinion that paying more for deposits is an effective method for banks to maintain loyal customers.

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"The rise in interest rates has given rise to the popularity of high-yield savings accounts once again, with some banks competing aggressively to keep up top of the rate tables consumers use as a comparison tool," Andrew Davidson, a chief insights officer at Mintel, a market intelligence firm, explained.

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"There has been an overall drop in deposits, which has led more companies to reach out to their customers over the last few weeks, which has further fuelled the intense competition," he stated.

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There are also other ways in which banks try to retain customers such as explaining to them the rules around deposit insurance, offering different products, or emphasizing their ties to local communities in order to appeal to them.

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Several of the smaller banks that suffered the most damage from the recent financial crisis have managed to stay afloat for now, according to a report released by the Federal Reserve on a weekly basis. The outflows continue to be closely monitored by industry experts.

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Deposit Outflow Stabilizing

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The data from the Federal Reserve showed that smaller U.S. banks -- which are defined as those that are not among the 25 largest U.S. banks ranked by assets - saw the number of deposits they hold on deposit stabilize during the week ending March 22, down just $1.1 billion compared to the previous week. This is in comparison to $185 billion of deposits that were yanked out of smaller lenders by panicked customers during the week ending March 15, after SVB collapsed. Despite this, data from the Federal Reserve showed that deposits at smaller banks were still down around $216 billion from their December high during the week ending March 22.

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It was reported recently by the Independent Community Bankers of America, an industry group, that many of its members had actually gained deposits in recent weeks due to consumers and small businesses seeking out banks with strong ties to the markets in which they live and work.

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ICBA's executive vice president and chief of government relations and public policy, Anne Balcer, said that despite the failure of SVB, community banks have not reported widespread withdrawals as a result of the failure. "The Main Street community banks have proven to be resilient during economic downturns and have always been there for their customers during uncertain times."

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There was a loss of $96.2 billion in deposits for large U.S. banks in the week ending March 22 according to Fed data released on Friday. The decline in depositor deposits was attributed to a move of cash from money market funds to higher-yielding money market funds by several analysts.

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The deposits of large banks have dropped by about $519 billion from their peak of $11.2 trillion in February last year.

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As middlemen in the economy, banks act as a link between depositors and borrowers by taking deposits and making loans. There has been a decline in deposits recently, but that hasn't stopped banks from extending loans to households and businesses as a result.

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"While tighter funding conditions for banks have not translated into any notable deceleration in the aggregate loan growth for the U.S. banking sector compared to February levels," analysts at Moody's Investors Service noted in a report.